National Retail’s Key Risks
In our opinion, management’s conservatism reduces most of the diversifiable risk the company faces. It seems unlikely to us that any one industry, customer, or geography could permanently impair the company’s long-term earnings potential.
However, it’s worth noting that most of National Retail’s tenants are mostly non-investment grade businesses, which are ostensibly riskier that investment grade tenants in the event of a recession.
Management targets this group because it allows for better pricing and rent growth. The company also believes that tenant credit ratings can be a fleeting factor, and there is always room for tenant credit improvement.
We aren’t overly concerned about this risk factor based on National Retail’s results during the last recession (87% of prior leases were renewed in 2009), consistently high occupancy rates, and overall mix of tenants – roughly 66% of National Retail’s rent is from public companies of those with rated debt.
While most retail tenants will be impacted by an economic downturn, National Retail’s industry diversification provides some protection. For example, convenience stores are its largest industry exposure at 17% of rent and would likely perform relatively well during a recession. NNN’s stock also outperformed the S&P 500 by 16% in 2008, perhaps providing some support to this theory. Regardless, economic weakness would not impair the company’s long-term earnings power.
Finally, when analyzing REITs, we always feel obligated to mention that they generally face higher capital market risk than other types of business models. REITs have less capital at their disposal to grow their businesses because they are required to pay out almost all of their earnings in the form of dividends.
As a result, they depend on issuing shares and raising debt for growth. Should capital markets tighten up and business fundamentals deteriorate, dividend cuts can become a real risk depending on the REIT. We view National Retail as conservatively financed compared to most REITs given its leverage ratios and debt maturity schedule, but this is an important risk to remain aware of for all of your REIT holdings.
Dividend Analysis: National Retail Properties
We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. National Retail’s long-term dividend and fundamental data charts can all be seen by clicking here.
Dividend Safety Score
Our Safety Score answers the question, “Is the current dividend payment safe?” We look at factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
National Retail’s Dividend Safety Score of 59 suggests that its current dividend payment has above-average safety. The company’s adjusted funds from operations (AFFO) payout ratio was 75% in 2015. While we generally prefer a lower payout ratio for most types of businesses, National Retail’s long-term leases, high occupancy rates, and quality real estate locations alleviate some of our grievances. As seen below, the company has generated remarkably stable operating margins, resulting in a relatively stable earnings profile.
Source: Simply Safe Dividends
Dividend safety is also boosted by the company’s strong occupancy rates, which even held up during the last recession. At the end of 2009, National Retail’s occupancy rate was 96.4%. The company was also less diversified than it is today with tenants in 13 different industries compared to 38 in 2015. National Retail generated $1.70 AFFO per share in 2009, which solidly covered its $1.50 per share dividend. It’s also worth mentioning that the company has successfully made acquisitions most years to continue growing the business in many environments (sales increased throughout the recession thanks to acquisitions).
Source: Simply Safe Dividends
